Appleby Mayer Brown Insurance Presentation

Insurance and Reinsurance Legal
Developments: Financial Convergence
& Global Regulatory Updates

The Convergence of Derivatives and
Insurance
Ed Parker
Partner
Banking and Finance
London

I. Transformer Structures
A. Basic Insurance to Derivative Structure
1 2 3
Policyholders Insurer Reinsurer Counterparties
Insurance
Policy
Reinsurance
Contract
Swap
Contract

I. Transformer Structures
A. Basic Insurance to Derivative Structure
Risk begins life as an insurance policy and ends up (in whole or in
part) as a derivative. Examples Include:
Insurance Policy (Front End) Derivative (Back End)
• Variable annuity with rider benefit •Equity derivative
•Fixed annuity, life contingent (incl. •Longevity swap; interest rate or
pension)
inflation hedge
•Term life, accumulation of XXX
reserves
•Mortality swap
•Financial guarantee policy •Credit default swap
•Property insurance policy or portfolio •Weather derivative; cat swap
•Other dual trigger property & casualty •Weather; commodities; currency;
inflation

I. Transformer Structures
A. Basic Insurance to Derivative Structure
1 2 3
Policyholders Insurer Reinsurer Counterparties
Insurance
Policy
Reinsurance
Contract
Swap
Contract

Goals
I. Transformer Structures
A. Basic Insurance to Derivative Structure
Goals of Insurance-to-Derivative Transactions
• Insurer may seek alternative (to reinsurance) market for risk transfer capacity, or
natural home of risk is swap market rather than traditional reinsurance. For life
or property & casualty insurer, transformer structure provides access to
derivative market for risk transfer while also providing:
Credit Credit for reinsurance (netting down of reserves)
Risk based capital relief (RBC is shifted to transformer entity)
Hedge capacity without need for derivative use plan
• Ultimate seller of protection may prefer derivative form.
May not be licensed as insurer or reinsurer
May be more comfortable with swap documentation, legal framework
May prefer swap structure in connection with collateral arrangement
• Preservation of accounting treatment.
Accrual accounting
Embedded derivatives

I. Transformer Structures
A. Basic Insurance to Derivative Structure
1 2 3
Policyholders Insurer Reinsurer Counterparties
Insurance
Policy
Reinsurance
Contract
Swap
Contract

I. Transformer Structures
A. Basic Insurance to Derivative Structure
Mechanics of Insurance-to-Derivative Risk Transformation
1 Traditional insurer (domiciled in US) issues policy
2
3
Reinsurer, as transformer entity, issues reinsurance contract
to insurer
• Domiciled offshore; alternative approaches, licensing status
• Domiciled in jurisdiction (e.g., Bermuda) that allows back
end derivative to provide capital treatment
• Collateralizes with LOC, Reg 114 Trust or Funds Withheld
Derivative counterparty provides protection to transformer
Reinsurer in swap form

I. Transformer Structures
A. Basic Insurance to Derivative Structure
1 2
Policyholders
Insurance
Policy
Insurer
Reinsurance
Contract
SPV Reinsurer
4
Reinsurance
Contract
3
Swap
Contract
Reinsurer
Counterparties

I. Transformer Structures
A. Basic Insurance to Derivative Structure
Variation on theme -- risk is split
into two components:
• Traditional insurance risks are
reinsured either with traditional
reinsurer or affiliate of ceding
insurer
• Market risks are transferred in
swap form to derivative
counterparty

I. Transformer Structures
B. Basic Derivative to Insurance Structure
Protection
Buyer
1 2 3
Counterparty Insurer Reinsurer
Derivative
Insurance
Policy
Reinsurance
Contract

I. Transformer Structures
B. Basic Derivative to Insurance Structure
Risk begins life as a derivative and ends up (in whole or in part)
as reinsurance. Examples include:
Derivative (Front End) Reinsurance (Back End)
• Credit default swap – loans or
bonds
• Credit default swap – asset
based
•Financial guaranty
•Credit insurance
•Longevity swap •Longevity reinsurance
•Pension buy-in or buy-out •Longevity, asset, inflation
reinsurance (sometimes split)
•Weather derivative •Catastrophe or other eventtriggered
reinsurance

I. Transformer Structures
B. Basic Derivative to Insurance Structure
Protection
Buyer
1 2 3
Counterparty Insurer Reinsurer
Derivative
Insurance
Reinsurance
Policy
Contract

Goals
I. Transformer Structures
B. Basic Derivative to Insurance Structure
Goals of Derivative-to-Insurance Transactions
• Original protection buyer may prefer derivative form, but counterparty may desire access
to insurance and reinsurance marketplace (price, capacity, liquidity, diversification of
funding and risk transfer sources)
Relief from insurable interest requirement
If bank, more straightforward for regulatory capital relief
Comfort with documentation (especially standardization of ISDA)
Preference for mark to market accounting
• Ultimate protection seller may prefer reinsurance form
Professional reinsurer may wish to book premium, hold liability on accrual or book
value basis
Insurer or reinsurer may wish to expand into credit and financial risk markets
• Insurance regulatory
Ultimate protection seller may not be licensed as insurer in protection buyer’s place of
domicile
Financial intermediary may not be licensed as insurer in protection buyer’s place of
domicile

I. Transformer Structures
B. Basic Derivative to Insurance Structure
Protection
Buyer
1
Derivative
Counterparty-1
(Onshore)
Counterparty-2
(Offshore)
2 3
Insurer Reinsurer
Insurance
Reinsurance
Policy
Contract

I. Transformer Structures
B. Basic Derivative to Insurance Structure
1
2
Mechanics of Derivative-to-Insurance Risk Transformation
Protection buyer enters into derivative transaction with
Counterparty-1 (typically onshore, rated)
Counterparty-1 enters into back to back derivative
transasction with Counterparty-2 in order to move risk
offshore
Offshore insurer (SPI, SAC or fully licensed insurer) insures
Counterparty-2 against loss under derivative contract
• Purpose is so that ultimate risk protection seller can
write protection in reinsurance form
• Key issue discussed below: Is insurance against loss
under a derivative transaction an “insurance policy” or
a “swap” under Dodd Frank?

I. Transformer Structures
3
B. Basic Derivative to Insurance Structure
Mechanics of Derivative-to-Insurance Risk Transformation
Traditional reinsurer enters into reinsurance transaction with
insurer, indemnifying against loss under insurance policy
issued to Counterparty-2

Type of Vehicles
Brad Adderley
Partner
Corporate and Commercial
Bermuda

TYPE OF VEHICLE
• Sophisticated Participants x 2
• Limited Recourse
• Fully Collateralised
• Transparency
• Specific Purpose
• Limited Life

• Side Cars
TYPE OF STRUCTURES
• Certain Class 3 companies
• Segregated Account
• ILS Fund Structures
• Transformers

DEFINITION OF INSURANCE
“insurance business” means the business of
effecting and carrying out contracts -
(a) Protecting persons against loss or
liability to loss in respect of risks to
which such persons may be exposed; or
(b) to pay a sum of money or render money’s
worth upon the happening of an event,
and includes re-insurance business.

DESIGNATED INVESTMENT CONTRACT
• Application to BMA
• Timing – 1 week to 3 weeks
• Fee – $1450
• Private Act
• Designation

WORDS OF APPROVAL
Any ISDA Swap Agreement to which the
Company is a party whereby payment is
triggered by a reference to fluctuations in
the value or price of property of any
description, or in an index, or other
factor, specified for that purpose in the
contract, shall be deemed a designated
investment contract pursuant to Section
57A of the Act, provided that the payment
under such contract is not an indemnity
payment for, not triggered by or contingent
upon, an actual loss suffered by the payee
under the relevant contract.

Legal and Regulatory Issues
David Alberts
Partner
Corporate & Securities
New York

Distinguishing Insurance v. Swaps under Dodd-
Frank
Swaps Regulation under Title VII
A.Definition of Swap under section 721(a)
A.excludes insurance
B.Regulatory Line Drawing
A.CFTC/SEC – regulate swaps, which
B.“(1) shall not be considered insurance; and
C. (2) may not be regulated as an insurance contract under the law of any
State.” Section 722(b).
C. Distinguishing Insurance v Swaps
A.CFTC/SEC Proposed swap definition rules and interpretive guidance
released April 27, 2011 (Federal Register release May 23, 2011).
B.Opening line drawing attempt; Comment Letters; Still awaiting final
Swap definition rules
D.Applicability to convergence products such as transformers

II. Legal and Regulatory Issues
A. Dodd Frank
Title VII Goals:
• Transparency
• Mitigation of counterparty risk
• Comprehensive regulation
• Mandatory clearing and trade execution
• Margin for uncleared swaps
• Swap data reporting
However there is a general carve out for insurance
products under Dodd Frank:
Definition of ‘‘swap’’ as used in
section 3(a)(69) of the Act clearly
excludes insurance products and…
“The Commissions do not interpret this clause to
mean that products historically treated as
insurance products should be included within the
swap or security-based swap definition.
Moreover, that swaps and insurance products are
subject to different regulatory regimes is
reflected in section 722(b) of the Dodd-Frank Act
which, in new section 12(h) of the CEA, provides
that a swap ‘shall not be considered to be
insurance’ and ‘may not be regulated as an
insurance contract under the law of any State.’”

II. Legal and Regulatory Issues
A. Dodd Frank – Significant Proposed Regulation – Two Part Test
240.3a69–1 Definition of ‘‘swap’’ as used in section 3(a)(69) of the Act—Insurance .
[“Part (a) Test”]
“The term swap as used in section 3(a)(69) of the Act (15 U.S.C. 78c(a)(69)) does not
include an agreement, contract, or transaction that:
(a) By its terms or by law, as a condition of performance on the agreement, contract,
or transaction:
(1) Requires the beneficiary of the agreement, contract, or transaction to have
an insurable interest that is the subject of the agreement, contract,
or transaction and thereby carry the risk of loss with respect to that
interest continuously throughout the duration of the agreement, contract,
or transaction;
(2) Requires that loss to occur and to be proved, and that any payment
or indemnification therefor be limited to the value of the insurable interest;
(3) Is not traded, separately from the insured interest, on an organized
market or over-the-counter; and
(4) With respect to financial guaranty insurance only, in the event of
payment default or insolvency of the obligor, any acceleration of payments
under the policy is at the sole discretion of the insurer; and

II. Legal and Regulatory Issues
A. Dodd Frank – Significant Proposed Regulation - Two Part Test
[“Part (b) Test”]
(b) Is provided:
(1) By a company that is organized as an insurance company whose primary and
predominant business activity is the writing of insurance or the reinsuring of risks
underwritten by insurance companies and that is subject to supervision by the
insurance commissioner (or similar official or agency) of any State, as defined
in section 3(a)(16) of the Act (15 U.S.C. 78c(a)(16)), or by the United States or
an agency or instrumentality thereof, and such agreement, contract, or transaction is
regulated as insurance under the laws of such State or of the United States;
(2) By the United States or any of its agencies or instrumentalities, or pursuant to a
statutorily authorized program thereof; or
(3) In the case of reinsurance only, by a person located outside the United States to an
insurance company that is eligible under paragraph (b) of this section, provided that:
(i) Such person is not prohibited by any law of any State or of the United States
from offering such agreement, contract, or transaction to such an insurance
company;
(ii) The product to be reinsured meets the requirements under paragraph (a)
of this section to be insurance; and
(iii) The total amount reimbursable by all reinsurers for such insurance product
cannot exceed the claims or losses paid by the cedant.

II. Legal and Regulatory Issues
A. Dodd Frank – Additional Issues
1. Insuring swap losses: Is the insurance of a protection seller’s risk of loss under a
derivative an insurance policy or a swap? Different views from SEC and CFTC:
CFTC: The CFTC believes that an insurance ‘‘wrap’’ of
a swap may not be sufficiently different from the
underlying swap to suggest that Congress intended
the former to fall outside the definition of the term
‘‘swap’’ in Title VII.
• The Commissions have requested comment on this issue.
SEC: The SEC believes that, where an agreement,
contract, or transaction is a security-based swap, the
insurance of that security-based swap should not be
regulated pursuant to Title VII, provided that the
insurance meets the proposed requirements discussed
above.
2. Life Insurance Applicability: Requirement of insurable interest throughout
inconsistent with basic life insurance law.

II. Legal and Regulatory Issues
A. Dodd Frank - Swap Dealer
and Major Swap
Participant Definitions
• The Commissions also are
considering whether the issuer
of such insurance (or
guarantee) in respect of swaps
or security-based swaps
entered into by an affiliate or
third party could be considered
to be a major swap participant
or major security-based swap
participant.
• The Commissions have
requested comment in the
proposing release for the
definitions of the terms ‘major
swap participant’ and ‘major
security-based swap
participant’.
Not part of regular
business
Swap dealer
An entity which regularly enters
into swaps in the course of
ordinary business
Do the exemptions
apply?
De minimis
Swap Participants
Security based Major swap participant
swap dealer Major
security
based swap
participant
Loan hedging
Not a swap dealer, but
maintains a substantial
position in swaps; its
swaps create substantial
counterparty exposure;
or it is highly leveraged,
but not subject to bank
capital requirements

II. Legal and Regulatory Issues
B. European Market Infrastructure Regulation (EMIR)
2011:
Continued
negotiation of
EMIR.
19 December 2011 –
Final Trilogue
negotiation fails to
reach agreement.
14 February 2012
– New Trilogue
negotiations.
30 June 2012 – All
draft implementing
technical standards
need to be submitted
to the Commission.
End-2012 –
Implementation of
EMIR by Member
States. Now looking
increasingly unlikely.

II. Legal and Regulatory Issues
B. European Market Infrastructure Regulation (EMIR)
Objectives of EMIR
• Reduce Risk
• Increase Transparency
How EMIR will meet these Objectives
• Increased Standardization
• Use of Trade Repositories
• Organized trading venues
• Increased use of Central Counterparties (CCP’s)
• Increased Transparency
• Strengthening Bilateral Collateralization
Management of Non-CCP-Eligible Contracts.

II. Legal and Regulatory Issues
C. Insurance Regulation in the US
1. The insurance business in the United States is
generally governed by state laws (50 separate
“countries”)
2. Critical issue in certain derivative transactions is
whether contract may be regulated as “insurance”
• Where protection buyer has or is expected to have an insurable interest in the
reference obligations or assets, this has been an issue (especially in derivative
to insurance transformer transactions)
• Dodd-Frank is helpful is drawing the line, providing certainty that swap will
not be regulated as insurance (See proposed regulation above)
• Also, Dodd-Frank includes a list of swaps that are presumptively swaps and
not insurance
3. Reinsurance is generally governed by the same rules, but some states (for
example, New Jersey, Illinois and Connecticut) have broad exemptions that leave
reinsurance unregulated

II. Legal and Regulatory Issues
D. Taking Collateral: Protecting Yourself
1 2 3
Policyholders Insurer Reinsurer Counterparties
Insurance
Reinsurance
Swap
Policy
Contract
Contract
Common to pledge cash
& government securities
Reduce counterparty risk
Heavily
negotiated
Mark to market
Re-Posting of Collateral
(Reg 114 Trust)
Initial Collateral Posting
(ISDA CSA)
Key issues in harmonizing ISDA CSA with US
Credit for Reinsurance Collateral Structures:
• Legal terms (ISDA v Reg 114)
• Insurance regulatory concerns
(premature drawdown, “rogue
regulator”)
• Mismatch in collateral amounts

III. Derivative Transactions with US Insurers
A. Overview
Insurance companies
are required to have
derivative use plans
approved by their
regulator.
Example: N.Y. ISC. LAW
§ 1410(b)(3)
Entering into derivative transactions with insurance companies
presents certain legal issues and considerations:
net down reserves; or
Derivative
transactions do
not enable the
insurer to:
obtain risk based
capital reduction/relief.
uncertainty re setoff
and close out netting in
insurer insolvency and
Historically,
counterparties were
hesitant to enter
into derivatives with
insurers because:
liquidation of collateral
was subject to stay risk
under state insurance
insolvency law.

III. Derivative Transactions with US Insurers
B. Current State Law – Model Act States
• In 1997 the NAIC adopted Section 46 (“Qualified Financial
Contracts”) of the NAIC Rehabilitation and Liquidation
Model Act.
• Provides counterparties to derivative transactions with
insurance companies protections similar to those under
U.S. Bankruptcy Code.
• Now outlined in Section 711 of the NAIC Insurer Receivership Model Act
(“IRMA” or the “Model Act”).
• The QFC Provisions allow (among other things):
counterparties to exercise terminations rights, including close-out
netting; and
counterparties to avoid having collateral tied up in state insolvency or
delinquency proceedings should an insurer become insolvent.

III. Derivative Transactions with US Insurers
B. Current State Law – Model Act States
• As of January 2012, adopted in
Arizona
Connecticut
Delaware
Illinois
Indiana
Iowa
Maine
Maryland
Massachusetts
Michigan
Minnesota
Missouri
Nebraska
New York
Ohio
Texas
Utah
Virginia
• These are the 18 “Good” States – i.e., QFC provisions
benefit counterparties entering into derivative
transactions with insurers domiciled in these states.

III. Derivative Transactions with US Insurers
B. Current State Law – Non-Model Act States
• Setoff likely to be enforced for mutual debits and credits.
Example:
“[i]n all cases of mutual debts or mutual credits between the
insurer and another person in connection with any action or
proceeding under this chapter, such credits and debts shall be
set-off and the balance only shall be allowed or paid....” Del.
Ins. Code § 5927(a).
New York Court of Appeals has specifically upheld similar
provision in the context of an insurance liquidation proceeding.
See, e.g., Midland Ins. Co., 79 N.Y.2d at 264-65 (1992).

III. Derivative Transactions with US Insurers
B. Current State Law – Non-Model Act States
• However, some uncertainty about early termination rights (as
ipso facto clauses), leaving certain obligations “unmatured” and
giving rise to potential for liquidator to cherry pick (AMBAC)
• Injunction order likely to prevent immediate liquidation of
collateral
However, rights of secured creditors ultimately likely to be
preserved
But, time it will take to obtain relief from injunction to
seize/foreclose and liquidate collateral is unclear

Insurance Regulatory Update
Progress toward Solvency II
Equivalency
17 April 2012

Tim Faries
Partner
Head - Global Insurance Team
Bermuda

Solvency II Equivalency – The story
• Bermuda in first tier of countries to
be evaluated for Solv. II equivalency
• EIOPA visit in June ’11; largely
positive preliminary report in
autumn ‘11
• EIOPA“‘Segmented equivalency’
possible”
• Potential treble win for the Island
• Final word expected in 2013

Recent Regulatory Developments
• 1 April 2012 – BMA Amendment Act 2012 reduces
fees for SPIs by nearly one half!
• March 2012 – Insurance Amendment Act enhanced
BMA’s enforcement powers
• February 2012 – Eligible Capital Requirements to
be implemented 1 January 2013
• January 2012 – Quarterly Filing Requirements for
Groups, Classes 4 and 3B (due May, August and
November 2012)
• 31 December 2011 - Group Supervision Rules go live
(except for ECR provisions, which take effect 1
Jan ’13)

BCSR and Eligible Capital
Requirements
• RCR
• BSCR or approved ICM
used to calculate…
• ECR, which in turn is
used to calibrate…
• TCL, which is 120% of
ECR
• All of the above is
included in the CSR
• Eligible Capital
Requirements for both
solo entities and groups
will be implemented on 1
January 2013
• Presently outlined in
Group Supervision Rules
for groups and Eligible
Capital Rules 2011 for
solo entities
• Three-tiered system
• Transition period to
have capital instruments
compliant is 10 years,
to 1 January 2024

Group Supervision
• Solvency and Supervision Rules apply to all
insurance groups for which the BMA is appointed
group supervisor – if you haven’t been notified
by BMA that they are your group supervisor, they
(mostly) don’t apply to you…yet
• Solvency Rules prescribe calculating group ECR,
filing a Group return, filing quarterly unaudited
FS, quarterly report of material intra-group
transactions
• Supervision Rules establish rules and procedures
for parent boards, minimum margins of solvency for
Groups and group eligible capital requirements.

What does it all mean for SPIs?
• SPIs largely outside the enhanced
requirement regime, in keeping with
their risk profile as a “limited
purpose” entity
• SPI fees reflect relatively low level
of supervisory time expected to
adequately oversee them

Lawrence Hamilton
Partner
Corporate & Securities
Chicago

NAIC Solvency Modernization
Initiative and Revisions To
Insurance Holding Company
Model Law and Regulation

NAIC Solvency Modernization Initiative
The NAIC Solvency Modernization Initiative (SMI) is a
critical self-examination process aimed at updating the US
insurance solvency regulation framework and at least
considering international models. It focuses on five issues:
• Capital requirements
• Governance and risk management
• Group supervision
• Statutory accounting and financial reporting
• Reinsurance

Governance and Risk Management
• Study international corporate governance principles and
standards
• Develop Enterprise Risk Management (“ERM”)/Own Risk
and Solvency Assessment (“ORSA”) tool
• The NAIC SMI (EX) Task Force adopted the NAIC ORSA
• The NAIC SMI (EX) Task Force adopted the NAIC ORSA
Guidance Manual at the NAIC’s 2011 fall meeting

Group Supervision – Holding Company Model Act and
Regulation
• Group supervision is performed under each state’s Insurance
Holding Company Act and Regulations, most of which are based on
NAIC models that were first adopted in 1969 and significantly
amended in 2010
• The original holding company regulatory regime was focused on
building “walls” around the insurer:
– Domestic commissioner’s approval required to acquire control
of an insurer (Form A)
– Domestic commissioner gets to review insurer’s material
transactions with affiliates and extraordinary dividends (Form
D)
– Domestic commissioner has power to examine insurers and,
where insurer fails to produce information, the insurer’s
affiliates
– Domestic commissioner has exclusive receivership authority
over insolvent insurers

Group Supervision – Changes to Holding Company
Model Act and Regulation
• In December 2010, the NAIC adopted revisions to the NAIC
Insurance Holding Company Model Act and Regulations
• The 2010 amendments moved from an approach based on
“walls” to an approach based on “windows and walls”
• The term “windows” means being able to look at any entity
within an insurance holding company system that could pose
financial or reputational risk to the insurer
– More communication between regulators and participation in
“supervisory colleges”
– Development of holding company “best practices”
– Access to more financial information about the insurer’s parent and
other affiliates
– Consideration of group-wide capital assessment

Group Supervision – Status of Legislative and
Regulatory Changes
• Revisions to the NAIC Insurance Holding Company Model
Act and Regulations need to be adopted by state
legislatures to become effective
• As of this date, the revisions have been enacted in four
states (Indiana, Rhode Island, Texas and West Virginia)
and bills are pending in about 10 additional states
• The New York Department of Financial Services issued a
circular letter in 2011, outlining its expectation that
insurers implement a formal ERM function

Revisions to the “Form B” Annual Holding Company
Registration Statement
• Must include a statement that the insurer’s board of
directors is responsible for and oversees corporate
governance and internal controls and that the insurer’s
officers or senior management have approved,
implemented and continue to maintain and monitor
corporate governance and internal control procedures
• Must include a confidential ERM report provided by the
insurer’s ultimate controlling person, designed to identify
the material risks within the insurance holding company
system that could pose financial and/or reputational
contagion to the insurer

Items to Be Covered in the ERM Report
• Any material developments regarding strategy, internal audit
findings, compliance or risk management affecting the
insurance holding company system
• Acquisition or disposal of insurance entities and reallocating of
existing financial or insurance entities within the insurance
holding company system
• Any changes of shareholders of the insurance holding company
system exceeding 10% of voting securities
• Developments in various investigations, regulatory activities or
litigation that may have a significant bearing or impact on the
insurance holding company system
• Business plan of the insurance holding company system and
summarized strategies for next 12 months

Items to Be Covered in the ERM Report
• Identification of material concerns of the insurance holding company
system raised by supervisory college, if any, in last year
• Identification of insurance holding company system capital resources
and material distribution patterns
• Identification of any negative movement, or discussions with rating
agencies which may have caused, or may cause, potential negative
movement in the credit ratings and individual insurer financial
strength ratings assessment of the insurance holding company
system (including both the rating score and outlook)
• Information on corporate or parental guarantees throughout the
holding company and the expected source of liquidity should such
guarantees be called upon
• Identification of any material activity or development of the
insurance holding company system that, in the opinion of senior
management, could adversely affect the insurance holding company
system

Revisions to the “Form A” Acquisition Process
• Acquiring person required to acknowledge that it and all subsidiaries
within its control will provide information to the commissioner upon
request as necessary to evaluate risk of financial and/or reputational
contagion to the insurer
• Acquiring person must provide the ERM Report in an updated Form
B within 15 days after end of month in which acquisition occurs
• Biographical affidavits for directors and executive officers must
undergo a third-party background check
• Acquiring person must file a “Form E” in the domestic state to
address competitive impact of the acquisition
• States may hold a joint public hearing if the Form A will require the
approval of more than one commissioner
• A control person that wishes to divest its controlling interest in a
domestic insurer must give the commissioner 30 days’ prior notice

Revisions to the “Disclaimer of Control” Process
• Control is presumed when a person directly or indirectly holds
10% or more of voting securities
• Prior to the revisions, the presumption could be rebutted by
filing a disclaimer of control, which became effective
immediately unless disallowed by the commissioner after a
hearing
• Disclaimers are no longer automatically effective upon filing
• Disclaimers only become effective if not disallowed within 30
days after filing
• If disallowed, applicant may request an administrative hearing
to seek reconsideration of the commissioner’s decision

Revisions to the “Form D” Affiliated Transaction
Review Process
• Management service and cost sharing agreements must include 13
specific items
• Insurers need to file amendments or modifications to previously
filed agreements, explaining the reason for the change and the
financial impact on the insurer
• Need to notify the commissioner within 30 days of termination of a
previously filed agreement
• All reinsurance pooling agreements must be filed; also need to look
ahead three years when deciding if other reinsurance agreements
meet the “5% of surplus” threshold for filing
• Must state how each inter-affiliate transaction meets the “fair and
reasonable” standard
• Whenever charges are based on market rates instead of cost, need
to supply the rationale

Enhancements to the Commissioner’s Examination
Powers
• Commissioner can examine not only the insurer but also its
affiliates to ascertain the financial condition of the insurer,
including the risk of financial contagion to the insurer by the
ultimate controlling person, any affiliates or combination of
affiliates, or the insurance holding company system on a
consolidated basis
• Commissioner has the power to issue subpoenas and examine
persons under oath, and may seek a court order to enforce
subpoenas, under penalty of contempt
• Sanctions for violating “Form A” approval requirements include
prohibiting all dividends or distributions from the insurer and
placing the insurer under regulatory supervision

Supervisory Colleges
• In order to assess the business strategy, financial position,
legal and regulatory position, risk exposure, risk
management and governance processes, and as part of
the examination of domestic insurers with international
operations, the commissioner may participate in a
“supervisory college” with other regulators charged with
supervision of the insurer or its affiliates, including other
state, federal and international regulatory agencies

Reinsurance

Reinsurance – The Effect of Dodd-Frank
• Reinsurance provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act took effect in 2011
– States must allow credit for reinsurance if it is allowed by
the ceding insurer’s domiciliary state
• If such state is an NAIC-accredited state or has financial
solvency requirements substantially similar to those
necessary for accreditation
– Laws of the state of domicile of the ceding insurer
preempt the extraterritorial application of most other
states’ laws regarding reinsurance
– Power to regulate reinsurer solvency now primarily
belongs to the reinsurer's domiciliary state

Reinsurance – NAIC amends its model law and
regulation
• In October 2011, after years of deliberation, the NAIC
approved amendments to the NAIC Credit for Reinsurance
Model Law and Model Regulation
• One of the key provisions of the amendments is the
departure from the requirement that unauthorized/
unaccredited reinsurers must post 100% collateral
• The Model Regulation creates a category of “certified
reinsurers” that are subject to reduced collateral
requirements based on ratings

Reinsurance – Last minute changes to the models at
the NAIC fall meeting
• Concentration risk limits
– A ceding insurer must notify the commissioner after
reinsurance recoverable from any single assuming insurer
or group of affiliated assuming insurers exceeds 50% of
the ceding insurer’s last reported surplus to policyholders
– A ceding insurer must notify the commissioner after
ceding to any single insurer or group of affiliated assuming
insurers more than 20% of the ceding insurer’s gross
written premium in the prior calendar year
– In both situations the notification to the commissioner
should demonstrate that the exposure is safely managed
by the ceding insurer

Reinsurance – Last minute changes to the models at
the NAIC fall meeting
• Qualified jurisdictions list
– The NAIC will publish a list of jurisdictions that
commissioners will consider when determining whether a
reinsurer seeking to be “certified” is domiciled in a
“qualified jurisdiction”
– If a commissioner approves a jurisdiction as qualified that
does not appear on the NAIC list of qualified jurisdictions,
the commissioner must provide documented justification
for approving the jurisdiction in question.

Reinsurance – Last minute changes to the models at
the NAIC fall meeting
• “Effective date” language in Section 8.A(5) of the Model
Regulation (based on a provision in New York’s Regulation
20) provides that credit for reinsurance from certified
reinsurers will apply only prospectively to risks assumed,
losses incurred and reserves reported from and after the
effective date of certification of the reinsurer
• This will limit the ability of reinsurers to reduce their
collateral obligations on in-force business that is already
reinsured and has existing collateral
• Indiana recently amended its previously enacted statute
to conform to the NAIC last-minute changes

Reinsurance – Impact of the NAIC amendments
• The NAIC has stated that the amendments to the models
will be evaluated and potentially revisited in two years
• The amendments to the NAIC models will have an impact
only to the extent that states choose to amend their laws
and regulations to conform to the NAIC models
• Since the amendments establish a floor for collateral
requirements, states that choose to maintain their current
stricter requirements will still meet the NAIC’s
accreditation standard

Reinsurance – States that have adopted reduced
collateral requirements
• States that have already amended their credit for
reinsurance laws and/or regulations:
– Florida (P&C only)
– Indiana
– New York
– New Jersey
– Virginia

Reinsurance – States that have legislation pending
• Additional states that have legislation pending to amend
their credit for reinsurance laws:
– Connecticut
– Georgia (awaiting Governor’s signature)
– Illinois
– Louisiana
– Missouri
– Texas (bill introduced in 2011)

Surplus Lines Regulation

Regulation of Excess and Surplus Lines Insurance –
Impact of Dodd-Frank
• Title V, Subtitle B of Dodd-Frank is the Nonadmitted and
Reinsurance Reform Act of 2010 (“NRRA”) – a verbatim
copy of the Nonadmitted and Reinsurance Reform Act
that was passed by the House in 2006, 2007 and 2009,
but went nowhere in the Senate until Senator Dodd baked
it into Dodd-Frank
• NRRA, which became effective on July 21, 2011, has
streamlined the patchwork of existing state-by-state
regulation of excess and surplus lines in a manner that is
designed to make it easier for large commercial
purchasers to obtain insurance from companies not
admitted to write insurance in their state

Who is eligible to write non-admitted insurance?
• The eligibility of non-admitted insurers for surplus lines
placement has been revamped
• Eligibility requirements on US-domiciled non-admitted
insurers now track the NAIC’s Non-Admitted Insurance
Model Act
• Eligibility for non-US-domiciled insurers is assured if the
insurer is listed on the NAIC’s Quarterly Listing of Alien
Insurers

Who is eligible to broker non-admitted insurance?
• No state other than the insured’s home state may require
a surplus lines broker to be licensed in that state in order
to sell, negotiate or solicit non-admitted insurance
• Beginning on July 21, 2012, no state can collect fees for
licensing surplus lines brokers, unless it participates in the
NAIC’s national insurance producer database, NIPR.

Who gets to buy non-admitted insurance?
• Surplus lines brokers can place coverage with nonadmitted
insurers on behalf of purchasers that meet the
statute’s definition of “exempt commercial purchaser”
without satisfying any state requirement to conduct a due
diligence search to determine if the insurance can be
obtained from an admitted insurer
• The definition of exempt commercial purchaser is similar
to the definition that some states previously had in place
for “industrial insureds”

An “exempt commercial purchaser”:
• employs or retains a qualified risk manager to negotiate
insurance coverage
• has paid over $100,000 in property and casualty insurance
premiums in the past 12 months, and
• meets at least one of the following criteria:
– possesses a net worth of $20 million
– generates $50 million in annual revenue
– employs more than 500 full-time employees or is a
member of an affiliated group that employs more than
1,000 full-time employees
– is a not-for-profit organization or public entity that
generates annual budgeted expenditures of $30 million, or
– is a municipality with a population in excess of 50,000

Who gets to collect tax on non-admitted insurance?
• Only the home state of an insured party may impose a
premium tax on insurance obtained from a non-admitted
insurer
• States may enter into compacts to allocate among them
the premium taxes paid to a home state, but purchasers
of insurance only need to pay one state
• A uniform system for allocating premium tax has not yet
been adopted across the states

GAO Study Mandated
• By January 2013, the Comptroller General is mandated to
produce a study, in consultation with the NAIC, of the
impact that the changes mandated by Title V of Dodd-
Frank have on the size and market share of the nonadmitted
market

Solvency Modernization – from Europe to
Bermuda to US: Corporate Regulatory
Developments
Colin Scagell
Partner
Corporate & Securities
London

EU – Solvency II
• Current status
• Omnibus II Directive vote postponed
• Level 2 implementing measures
• EIOPA technical standards and guidelines due Q3 2012
• Bifurcation approach still achievable?
#903171811

• FSA FAQ paper issued March 2012
• Internal model approval process ongoing
• Duplication of effort during “twin track” 2013 and legal
constraints
• Lloyd’s position and own model approval – July 2012
#903171811

Key Issues
• Third country equivalence
• Reinsurance contracts (article 172)
• Group Solvency – non-EEA subsidiary (article 227)
• Group Supervision – non-EEA parent (article 260)
• First Wave equivalence assessments
• Commission’s powers to determine transitional measures
• Colleges of supervisors
#903171811

FSA replacement
• FSA split expected early 2013
• “Twin Peaks” speech – independent but coordinated
regulation?
• Prudential Regulation Authority
• Financial Conduct Authority
• Regulatory consolidation elsewhere
#903171811

Insurance Tax Developments
George Craven
Partner
Tax Transactions and Consulting
+1 312.701.7231
gcraven@mayerbrown.com
April 2012
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships
established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer
Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown
logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

George Craven
Partner
Tax Transactions & Consulting
Chicago

Return of the Neal Bill

The New York Times - March 6, 2000

Return of the Neal Bill
Several times in the last 12 years Congressman Neal has
proposed legislation that would
– restrict deductions for reinsurance premiums which U.S.
insurers pay to an untaxed related reinsurer
– allow foreign reinsurers to escape this treatment by
– allow foreign reinsurers to escape this treatment by
electing to treat the premiums received from related
parties and the investment income on those premiums as
“effectively connected income.”

Return of the Neal Bill
The Obama administration proposed slightly more
restrictive rules as part of its FY 2011 budget proposal.
– H.R. 3424 (the 2009 Neal bill) would have disallowed
reinsurance deductions to domestic P&C companies to the
extent total reinsurance ceded by the U.S. company
exceeded industry averages
– The Administration’s FY 2011 proposal would have
disallowed the deduction to domestic life and P&C
companies to the extent reinsurance ceded exceeded 50%
of the insurance premiums received by the U.S. Company

Return of the Neal Bill
In February, 2012, the Obama Administration released FY
2013 budget proposals, including a proposal to
“deny an insurance company a deduction for
premiums and other amounts paid to affiliated
foreign companies with respect to reinsurance
property and casualty risks to the extent that
the foreign reinsurer (or its parent company) is
not subject to U.S. income tax with respect to
the premium received.”
– The proposal allowed the foreign reinsurance to escape by
electing ECI treatment.

Return of the Neal Bill
What will happen after the November election?

FACTA and Bermuda P&C Companies

FATCA and Bermuda P&C Companies
The Foreign Account and Tax Compliance Act (“FATCA”)
was adopted in response to recent controversy that many
U.S. taxpayers maintained accounts with foreign banks
and securities firms and did not report the income from
those accounts on their U.S. tax returns.
701542822

FATCA and Bermuda P&C Companies
FATCA requires “Foreign Financial Institutions” to report
information about their U.S. customers to the IRS.
If the FFI does not comply, then U.S. payors of interest,
dividends, etc. to the FFI must deduct and withhold a tax
equal to 30% of those payments.

FATCA and Bermuda P&C Companies
FATCA doesn’t contain the word “insurance.”
So why should insurance companies care about FATCA?

FATCA and Bermuda P&C Companies
The legislative history of FATCA says
“It is anticipated that the Secretary may prescribe
special rules addressing the circumstances in
which certain categories of companies, such as
certain insurance companies, are financial
institutions, or the circumstances in which certain
contracts or policies, for example annuity
contracts or cash value life insurance contracts,
are financial accounts or United States accounts
for these purposes”

FATCA and Bermuda P&C Companies
So foreign life and annuity insurance companies are
subject to FATCA.
But P&C Companies?
“Treasury and IRS do not view the issuance of
insurance or reinsurance contracts without cash
value as implicating the concerns of Chapter 4.
This would include, for example, most property
and casualty insurance or reinsurance contracts or
term life insurance contracts. Accordingly,
Treasury and the IRS plan to issue regulations
treating entities whose business consists solely of
issuing such contracts as non-financial institutions
for purposes of Chapter 4.
IRS Notice 2010-60, August 27, 2010

FATCA and Bermuda P&C Companies
But on February 15, 2012, the Treasury issued several
hundred pages of proposed regulations on FATCA.
Prop. deg §1.1471-5(e)(1)(iv) includes in the definition of
“financial institution”
an insurance company… that issues or is obligated
to make payments with respect to a financial
account under paragraph (b)(1) of this section
(emphasis added).

FATCA and Bermuda P&C Companies
Prop Reg. §1.1471-5(b)(i) defines “financial account” to
include
(i) Any depository account (as defined in (b)(3)(i)
of this section) maintained by a financial
institution (or defined in paragraph (e)(1) of this
section). (emphasis added)
Prop Reg. §1.1471-5(b)(3)(i) defines “depository account”
to include
(B) Any amount held by an insurance company
under an agreement to pay or credit interest
thereon. (emphasis added)

FATCA and Bermuda P&C Companies
So if a P&C Company agrees to pay or credit interest to a single
customer
– for a delay in payment of a claim
– for a refund of a premium for a cancelled policy
– for a reinsurance contract on a funds withheld basis
Does that make the agreement a “depository account,” and a
“financial account” and the insurance company a ‘financial
institution”?

FATCA and Bermuda P&C Companies
Will the U.S. custodian of the insurance company’s Investment
assets be willing to take the risk that it does not have to
withhold 30% of the insurance company’s U.S. source
investment income.

Developments Regarding Cascading
FET

Developments Regarding Cascading FET
U.S. Corporation/
U.S. Risks
1 st leg
direct insurance of U.S. Risks
2 nd leg
U.S. risks reinsured
Premium Non-U.S.
Insurer
(no treaty)
Premium
4% FET
1%?
Non-U.S.
reinsurer
(no FET waiver)

Developments Regarding Cascading FET
U.S. corporation/
U.S. risks
U.S. insurer
1 st leg
U.S. risks reinsured
Non-U.S.
reinsurer
(no FET waiver)
2 nd leg
U.S. risk retroceded
premium premium premium
1% FET 1%? FET
Non-U.S.
reinsurer
(no FET waiver)

Developments Regarding Cascading FET
Section 4371 (1) imposes a 4% tax on P&C insurance premiums
paid to foreign insurers.
Section 4371 (2) imposes a 1% tax on life insurance premiums
paid to foreign insurers.
Section 4371(3) imposes a 1% tax on reinsurance paid to
foreigners of insurance policies subject to tax under (1) or (2).
Does Section 4371(3) apply to reinsurance premium paid from
F1 to F2?

Developments Regarding Cascading FET
The Service decided no in 1975.
Technical Advice Memorandum 7506168730A, June 16, 1975.
Although section 4371 of the Code is literally broad
enough to impose an excise tax on the reinsurance
premiums in connection with the transactions
presented herein, the Regulations under section
4734 would appear to be inconsistent with such a
conclusion. Accordingly, for this reason, the
premiums paid for reinsurance placed in *** with a
foreign insurer by *** are not subject to the excise
tax imposed by section 4371 of the Code.

Developments Regarding Cascading FET
The excise tax on insurance was from 1918 through 1965 collected by
a stamp tax. The 1918 act included the predecessor of section 6802,
which is still in the Code.
Internal Revenue Code § 6802 Supply and distribution.
The Secretary shall furnish, without prepayment, to –
(1) Postmaster General.
The Postmaster General a suitable quantity of adhesive stamps, coupons,
tickets, or such other devices as may be prescribed by the Secretary
pursuant to section 6302(b) or this chapter, to be distributed to, and kept
on sale by, the various postmasters in the United States in all post offices
of the first and second classes, and such post offices of the third and fourth
classes as –
(A) are located in county seats, or
(B) are certified by the Secretary to the Postmaster General as necessary.
(2) Designated depositary of the United States.
Any designated depositary of the United States a suitable quantity of
adhesive stamps to be kept on sale by such designated depositary.

Developments Regarding Cascading FET
Revenue Ruling 2008-15
On March 24, 2008, the Internal Revenue Service issued
Revenue Ruling 2008-15 describing the federal excise tax
(“FET”) consequences under section 4371 of insurance
premiums paid by one foreign insurer to another foreign
reinsurer where the premium is for the coverage of U.S. risks.

Developments Regarding Cascading FET
Announcement 2008-18
• Contemporaneously with the Revenue Ruling, the IRS
published Announcement 2008-18, a voluntary compliance
initiative setting forth the means by which taxpayers may
voluntarily comply with the imposition of the FET on a
cascading basis.
• With respect to those taxpayers otherwise in compliance, the
IRS agreed not to examine issues arising under the situations
described in Revenue Ruling 2008-15 in respect of premiums
paid from one non-U.S. insurer or reinsurer to another non-
U.S. reinsurer before October 1, 2008.
• Failures of a non-U.S. person to file or pay the 1 st leg FET will
not fall within the scope of the initiative.

Developments Regarding Cascading FET
Eligibility for the Voluntary Compliance Program
• Persons eligible to participate in the initiative include any non-
U.S. insurer or reinsurer or any other non-U.S. person liable for
the FET that has failed to file timely one or more Form 720
returns and pay or remit any 2nd leg FET due or to timely
disclose that it is claiming a treaty-based return position that it
is entitled to an exemption with respect to premiums paid or
received during any quarterly tax period ending before
October 1, 2008.
• An eligible non-U.S. person must timely file an applicable Form
720 return and pay any FET due with respect to premiums paid
or received on or after October 1, 2008, or timely disclose that
it is claiming a treaty-based return position that it is entitled to
an exemption with respect to such premiums.

Developments Regarding Cascading FET
Jurisdictional and Practical Issues
• The imposition of the FET on a cascading basis raises a number
of issues with which both non-U.S. insurance and reinsurance
companies and the IRS will struggle.
• The most significant question is whether the IRS has
jurisdiction over companies that have no U.S. nexus.
• In addition, there are numerous questions regarding the
determination of the amount of premium subject to the FET
and regarding how and from whom the IRS will seek to collect
the FET.

Developments Regarding Cascading FET
Would the Service’s position survive an attack based on the
Tax Court opinion in SDI International B.V. v. Commissioner,
107 T.C. 161 (1996)?

Developments Regarding Cascading FET
Does the rule of statutory construction – that in the
absence of clear Congressional intent, a statute is meant to
apply only within the territorial jurisdiction of the United
States – mean that FET does not cascade?

Insurance and Reinsurance Legal
Developments: Financial Convergence
& Global Regulatory Updates